Pension basics for family law practitioners 1

Pension basics for family law practitioners 1 By Sharon Kravetsky Taylor McCaffrey LLP A pension is a plan organized by an employer, a union or a government, primarily to provide a monthly annuity for a participating member after retirement. It will frequently provide additional benefits payable on the premature death, disability or termination of employment of the member. Most pensions require the participants to contribute to the cost of the plan; others do not. Except for certain government plans, the employer or union is responsible for the balance of the funding of the plan. This funding is subject to pension legislation governing the accumulation and investment of the contributions set aside each year in order to ensure that the funds are adequate to meet the obligation of providing the ultimate pensions. For a large portion of the families in Canada, vested rights in pension plans ultimately constitute the most significant aspect of family property. Even if there is a family home, these rights can still represent one of the two most significant elements of family property. Lawyers practicing family law must know certain basic facts about pensions in order to serve their clients well. 1. Income Tax Act The Income Tax Act (Canada) sets out conditions that all plans must observe in order to be registered under the Act and benefit from special tax rules respecting the treatment of contributions and the sheltering of investments. The Income Tax Act expressly allows for the division of registered pensions on the breakdown of a marriage or common law partnership. 2. Supplementary Benefits The Income Tax Act (Canada) allows pension plans to register under the Act and be given special tax treatment. The Income Tax Act, however, places a limit on the amount of a pension that can be paid from registered plans. In order to exceed that limit, some employers provide high income earners with a "top up" or supplemental pension plan ("SSP"). These plans are not registered under The Income Tax Act, nor are they regulated under provincial or federal legislation that sets out minimum standards for registered pensions. Payments are usually paid from the revenue of the employer company. 1 These comments are taken in part from information provided at the Law Society's presentation of pension issues in family law in February 2009 by Thomas Anderson, Q.C. of Anderson Pension Law Consulting in British Columbia, Debbie Lyon, the Superintendent of Pensions of the Manitoba Pension Commission and Gwen Hatch of the law firm, D'Arcy & Deacon LLP. The Family Way, February 2010 The CBA Family Law Section Newsletter Page 1

SPPs were once relatively rare. For many years, however, The Income Tax Act ceilings did not keep pace with inflation and it is more common now to find that a member is entitled to benefits under a registered plan as well as under a supplementary plan. Since the SSP is not regulated by the pension legislation, these benefits need not be included in the legislative scheme for pension division. Accordingly, lawyers should: 1.determine whether there are supplementary benefits; 2.check to see if the legislation deals with the supplementary benefits (for example, for federal public servants, the supplementary part of the pension is included in the division under the federal Pension Benefits Division Act); and 3.if not, deal with these benefits in alternate ways (such as by having the member pay the spouse compensation for the benefits in another fashion). 4. Types of Pensions There are three (3) basic types of pension plans: 1.Defined benefit plans: The benefit the member will receive and the value of a pension in a defined benefit plan depends on a fixed formula. There are three (3) types of defined benefit plans: (a) flat benefit, (b) career average earnings, and (c) final average earnings (an example is: (2 percent) X (years of service) X (average of final 5 years of salary). 2.Defined contribution plan: This plan consists of contributions (made by employers, employees or both) and investment returns on the contributions. When the member retires, the pension account is used to purchase an annuity for the member. Because of this, they are also often called "money purchase plans". They are similar in many respects to R.R.S.P.s. 3. Hybrid plans: Hybrid plans have features of both defined benefit plans and defined contribution plans. 5. How do you know which jurisdiction applies? 1. Federal Public Service Employees of the federal public service, and certain federal corporations participate in pension plans that are constituted under the Acts of the federal government. Some examples of these pensions plans are: The Public Service Superannuation Act and Supplementary Retirement Benefit Act, The Canadian Forces Superannuation Act, The Members of Parliament Retiring Allowances Act and The Royal Canadian Mounted Police Superannuation Act. 2. Federally Regulated Industries Employees of federally regulated industries such as inter-provincial transportation, trucking, tele-communications and banking are governed by The Pensions Benefits Standards Act.

3. Provincially Regulated Industries Unless the member is employed in the federal public service or in a federally regulated industry, the provincial legislation in your province will govern. The best way to be certain that you are proceeding under the correct piece of legislation is to contact the provincial and/or the federal Pension Commission to confirm the legislation that governs your particular client's employment. 6. Federal Pension Benefits Standards Act This Act covers employees in federally regulated industries, such as banks, TV and radio. On marriage breakdown, the pension is subject to provincial laws relating to the distribution of property on divorce as set out in s.25(2). On marriage breakdown, the member may assign all or part of their pension benefits to their spouse as set out in s.25(4). This means that an unequal division is possible. A pension under this Act may be dealt with under provincial property legislation or under The Pension Benefits Standards Act which lets the member divide the pension with the non-owning spouse. This is set out in the distribution section, s.25. It is also possible to create a separate pension plan which lets the spouse become a member of the plan themselves. 7. Federal Public Service Plans Federal public service plans such The Canadian Forces Superannuation Act, The Members of Parliament Retiring Allowances Act, The Royal Canadian Mounted Police Superannuation Act and The Public Service Superannuation Act are divided pursuant to The Pension Benefits Division Act. The Pension Benefits Division Act does not provide jurisdiction to divide pensions, but rather provides the mechanism to do so. An application may be made once there is an Order of divorce or separation which deals with the pension, or after the parties have lived separate and apart for one (1) year. It applies to married parties and since the year 2000, to common law partners. Common law partners are defined as parties who have cohabited for at least one (1) year. Each plan has it own application forms for division. Under The Pension Benefits Division Act, the maximum amount that can be transferred is fifty (50%) percent of the amount which accrued during the parties' relationship. However a division of less than this amount is also possible. The Pension Benefits Division Act does not apply to pension covered by provincial pension legislation and also does not apply to federally regulated private sector pensions governed by The Pension Benefits Standards Act. 8. Canada Pension Plan

Canada Pension Plan division rules apply in marriage and common law situations where parties have cohabited for over one (1) year. As of 1986, it is not possible to opt out of division of credits upon divorce unless provincial legislation permits. Provinces that permit Canada Pension Plan waivers are Saskatchewan, Alberta, British Columbia and Quebec (Q.P.P.). Division will only take place if application is made. There is no time limit for an application to divide C.P.P. credits after a divorce. There is a time limit of three (3) years to apply after the death of a spouse. For common law relationships, parties must be separated at least one (1) year, and the limitation period for an application is three (3) years. No payment is available from C.P.P. C.P.P. credits are transferred from the S.I.N. of one spouse to the S.I.N. of the other. In calculating the division, C.P.P. counts years as full years only, including the first year of cohabitation and excluding the year of separation. 9. R.R.S.P. R.R.S.P.s can be transferred only on the occurrence of two (2) events in a party's lifetime and one of those is upon death. The other is upon the breakdown of marriage or common law relationship. R.R.S.P.s can be equalized between the parties by means of a rollover. The R.R.S.P.s are not actually cashed out at that time, and therefore income tax is not payable. Each party will be responsible to pay the income tax on their own portion of the R.R.S.P.s whenever they are cashed out. In order to do a rollover, the parties must have either a written Separation Agreement or a Court Order which directs the transfer of the specific amount, and must complete the appropriate form, the T-2220. If the parties do not wish to share their R.R.S.P.s by means of a rollover, and wish to simply account for the value of the R.R.S.P.s as part of their property accounting, care must be taken to value the R.R.S.P.s taking into account their inherent tax liability. $10,000.00 in R.R.S.P.s is not the equivalent of $10,000.00 cash. Unless there is some indication that the R.R.S.P.s will actually be cashed out (for example to fund the equalization payment) convention is to discount the value of the R.R.S.P.s by approximately one-third (1/3 rd ) to take into account their inherent tax liability. 10. Pensions and Spousal Support The Double Dip A problem may arise where a party has equalized their pension upon marriage breakdown prior to retirement, and then is asked to fund continuing spousal support payments following their retirement from their pension income. The pension holding spouse may argue that, having already divided their pension with their spouse as part of property division, that they should not be asked to share it again as income. The Supreme Court considered this issue in the case of Boston. [2001] 2 SCR 413, 17 RFL (5 th ) 4 (SCC) The parties had a traditional thirty-six (36) year marriage. They entered into a Consent Judgment where they each retained approximately $370,000.00 in assets. As part of those assets, the husband retained his pension and the wife retained the marital home on one hundred and sixty-eight (168) acres of land in clear title. The husband agreed to pay the wife ongoing spousal support.

When the husband retired, his income decreased. His capital assets exceeded his debts by only $7,000.00. The wife continued to be unemployed, but her assets had increased from approximately $370,000.00 to approximately $493,000.00 by virtue of her prudent investments. The husband sought to reduce support from the $3,433.00 monthly he was then paying on the basis that to continue to pay support to the wife from his pension asset which had already been equalized would amount to double recovery for the wife. His pension income then consisted of $5,300.00 per month from a portion of the pension that had been equalized and $2,300.00 per month from pension income earned post-separation. Support was reduced to $950.00 per month. Justice Major considered that the wife was saving and accumulating for her estate the capital assets she had received on equalization, while the husband's only major asset was his diminishing pension. He focused on the portion of the husband's pension acquired post-separation in considering his ability to pay and the wife's ongoing need. The Court found that given each party's asset position, the wife would not suffer economic hardship if the portion of the pension that had already been equalized was not considered in assessing spousal support and concluded that "double recovery could be fairly avoided in this case" (paras 79 and 81). Boston Presumptive Rule Against Double Dipping In the Boston case, the Supreme Court set out a presumptive rule against double dipping. The Court said that where practicable, the Court should focus on the portion of the payor's income earned and assets accumulated post-separation where the payee spouse continues to have need for support ie. the growth in the payor's pension since separation. Double recovery should be fairly avoided (paras 63 and 64). The Court also discussed obligations of the payee spouse: 1. under a compensatory spousal support order or agreement, the payee spouse has an obligation to use the "real" tangible assets received on the accounting in an income producing way when the pension-holding spouse retires (para 54). 2. This obligation may not be practicable in long term / traditional marriages where the payee spouse is unable to become economically self-sufficient (para 55). 3. The payee spouse should use the equalized assets in a reasonable way to generate income by the time the payor spouse retires and not be allowed to accumulate an estate while the payor spouse's estate dissipates (para 56). 4. Where spousal support is in part compensatory, it may be unreasonable to expect the payee spouse to sell the marital home to generate income; the Court should as far as practicable have the support award enable the payee spouse to maintain a pre-separation comparable lifestyle and remain in the home (para 59). 5. Where the payee spouse has not invested assets in an attempt to produce income, the Court should impute income to the payee based on actuarial evidence (para 66).

Exception (the "Moge" Influence): Where the support award is based on need, compensation or both, double recovery cannot always be avoided. If the payor spouse has the ability to pay and the payee spouse has made reasonable efforts to use equalized assets in an income producing way, but economic hardship from the marriage or its breakdown continues, double recovery is permissible (para 65). Dissent of the Minority (Le Bel J., L'Heureux-Dubé J.) The minority held that no assets or income streams should be excluded or treated differently post-retirement for support purposes. Boston's Legacy Since Boston, Courts appear to have embraced the exceptions to the rule against double dipping, being ever mindful of the objectives of spousal support identified in Moge, and taking an overall practical approach. The exception to double recovery appear to be followed more often than the "rule". For example: Meiklejohn v. Mieklejohn (2001), 19 R.F.L. 5 th 167 (Ont. C.A.). Meikeljohn was a twenty-three (23) traditional marriage. The wife was ill at the time of the variation application. A significant portion of the husband's pension had not been equalized, because it was undervalued and a portion was acquired postseparation. Support was ordered for the wife based in need. Chamberlain v. Chamberlain (2003), 36 R.F.L. (5 th ) 241 (N.B.C.A.). In Chamberlain, the Court set out the presumption that only the unequalized portion of the pension should be considered, unless it is a case of need, in which case the Court can consider the equalized portion and permit double recovery. Marinangeli v. Marinangeli (2003), 38 R.R.L. (5 th ) 307 (Ont. C.A.). In Marinageli, the husband's pension had increased post-separation. The wife had received the home in lieu of her share of the husband's pension. Her home did not produce income and she was in need. Support was ordered utilizing the husband's pension income. Counsel and parties should consider this issue when dividing / waiving pensions where ongoing support or support variation may be contemplated.